Weighing In On The Debate Over Standardized Financing Documents

The topic of standardized angel or venture financing documents is is an old topic, for sure.  Most recently, Brad Feld weighed in on this issue back in March 2010 by valiantly offering to take on the task of drafting standardized financing documents, but following a post by his partner Jason Mendelson (along with probably millions of emails from the disparate groups wanting to help), Brad decided to set aside the idea.  Others have weighed in on this issue – Wang and Andreessen Horowitz, TechStars, YCombinator, Founders Institute, Fred Wilson, and another, and another, and even Yokum Taku weighed in with a comparison.  I am not sure how much another opinion adds to this discussion, but it’s a topic I still view worthy of debate as I think it will re-surface again and again in the future. 

People in the start-up community have long called for a set of standard financing documents – a set of financing documents whose structure and substance were widely viewed as acceptable to both the entrepreneur as well as the financier (e.g., angel, super-angel, early stage venture fund) and that fulfilled each side’s legal/business needs.  Why standardize financing documents versus any other corporate set of documents?  Well, one of the greatest needs for a start-up or early stage technology company is the capital needed to fund growth.  The lack of capital lies at the very heart of building an emerging growth company.  Entrepreneurs also don’t have the patience for long drawn out procedures so early in a company’s existence.  Speed is viewed as a competitive advantage to some.  Given that lack of capital, as well as the quick need for it, both entrepreneurs and angel and venture financing groups have long wanted a standard set of financing documents that could quickly result in a closed financing round.  A round of financing quickly closed on mutually acceptable terms and costing the least amount of money (i.e., legal fees) would be the goal.  If both goals couldn’t be achieved, I think reduced fees would be favored over speed when it comes to standardized financing documents. 

With that being said, if I had to argue against standardized financing documents, I’d probably point out the following flaws:

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